Asian Shares Weaken on Trade Worries, Bonds Recover as China Rebuts Report

Cornelia Mascio
Gennaio 14, 2018

"I think the Chinese will contribute to the removal of liquidity from the USA bond market", said Michael Shaoul, chairman and CEO of Marketfield Asset Management.

Markets took a turn south following a report suggesting the Chinese authorities now view United States government bonds as weak. "It's challenging to find any real substantial alternatives", with China earning dollars - the flip side of the US current account deficit.

"It's hard to see how China would emerge from this scenario better off", said Mark Williams chief Asia economist at research firm Capital Economics.

The PBOC is the second largest holder of US Treasuries in the world, after the Federal Reserve, and is estimated to have some $1.2 trillion of the bonds inside of its foreign exchange reserves.

The $14 trillion Treasury market has been roiled in the past 48 hours.

"The dollar may fall to around ¥110" in the days to come, the official said.

"We think this story could be quoting a mistaken source or it could also be a piece of fake news", the State Administration of Foreign Exchange said in a statement on its website.

The dollar nursed its losses against the yen on Thursday, having suffered its biggest one-day drop in almost eight months following a report that China was ready to slow or halt its purchases of U.S. Treasuries.

"But China is the largest buyer [of US Treasuries], what it says will deeply influence investors' sentiments". It isn't clear whether the recommendations of the officials have been adopted, Livemint reported.

Later that month, Hu Xiaolian, director of China's SAFE, said Treasuries form "an important element of China's investment strategy for its foreign-currency reserves".

In the end, China lifted its Treasuries holdings by $167 billion in 2009, or 23 percent, US data show.

ANLAYST'S TAKE: "Justifiably, Beijing's biggest worry is that the value of its US bond holdings will be eroded substantially by rising inflation and supply", Mizuho Bank Ltd. said in a daily commentary. The session high for the global benchmark was US$69.37, highest since May 2015.

For his part, Jeffrey Gundlach, known on Wall Street as the "Bond King", said on an investor webcast on Tuesday that if the 10-year Treasury yield pushes above 2.63 percent, it will accelerate higher.

Rising Treasury yields can pressure prices for Gold, but USD's slide helped Gold shrug off any impact.

Some market experts speculate that China might want to send a message to President Trump over trade. On Wednesday, the yield was trading around the highest level since March past year.

Dollars under pressure Vs JPY after the Bank of Japan (BOJ) moved to trim its long-dated government bond purchases this week, was on track to post its biggest 1-day drop Vs JPY in 7 weeks.

But any attempts to use that power could hurt the dollar, damaging China's own U.S. holdings.

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